Menorah v. INX, 1st Cir. (1995)

7/26/2019 Menorah v. INX, 1st Cir. (1995)

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USCA1 Opinion

United States Court of Appeals

For the First Circuit

____________________

No. 95-1495

MENORAH INSURANCE COMPANY, LTD.,

Plaintiff-Appellee,

v.

INX REINSURANCE CORPORATION,

Defendant-Appellant.


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____________________

No. 95-1497

MENORAH INSURANCE COMPANY, LTD.,

Plaintiff-Appellant,

v.

INX REINSURANCE CORPORATION

Defendant-Appellee.

_______________

APPEALS FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF PUERTO RICO

[Hon. Jose Antonio Fuste, U.S. District Judge]

____________________

Before


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Lynch, Circuit Judge, _____________

Campbell, Senior Circuit Judge, ____________________

Watson,* Senior Judge. _____________

____________________

Luis A. Melendez-Albizu, Jaime Sifre Rodriguez, and S _________________________ _______________________


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Betances & Sifre, were on brief for Menorah Insurance Company,________________

Juan H. Saavedra Castro was on brief for INX Rein __________________________

Corporation.

____________________

December 26, 1995

____________________

_________________

*Of the United States Court of International Trade, sitt

designation.


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LYNCH, Circuit Judge. After unsuccessful LYNCH, Circuit Judge. _______________

attempting to invoke arbitration under international busine

contracts, Menorah Insurance Company obtained an $812,9

default judgment in an Israeli court against INX Reinsuran

Corporation and then sought to enforce the judgment in

Puerto Rican court. After waiting a year, and on the eve

having an exequatur judgment entered against it, INX remo

the action to the U.S. District Court for Puerto Rico un


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the Convention on the Recognition and Enforcement of Forei

Arbitral Awards, implemented in 9 U.S.C. 201 et se __ _

(1994).1 The federal court found that INX had wai

arbitration and remanded. We affirm because INX has bo

explicitly and implicitly waived arbitration.

Under seven reinsurance treaties between the

Menorah, an Israeli company, and INX, a Puerto Ric

corporation, agreed that "all disputes" between them wou

be arbitrated and should be settled "in an equitable rat

than in a strictly legal manner."2 The locus of arbitrati

____________________

1. The Convention was opened for signature on June 10, 195

330 U.N.T.S. 38, and is reprinted in 9 U.S.C.A. 201

(West Supp. 1995).


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2. The arbitration clause presented by INX as bei

representative provides that:

All disputes which may arise between the

two contracting parties with reference to

the Interpretation or the carrying out of

this Agreement or to any matter

originating therefrom or in any way

connected with the same, and whether

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was to be Tel Aviv, Israel. Each side was to appoint


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arbitrator and should the two arbitrators disagree, then

"Umpire," previously designated by the two arbitrators, wou

decide. There was a default provision of sorts: "In t

event of either party failing to appoint an umpire within t

months after arbitration has been supplied [sic] for un

the question in dispute, then in either such case t

arbitrators and/or umpire shall be appointed by the chair

for the time being of the Israeli Fire Insuran

Association."

Menorah made a claim to INX for over $750,000 un

the reinsurance treaties, to which INX replied that it o

no more than $178,000 and intimated that fraud accounted f

the $500,000 difference. After unsuccessful negotiation


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Menorah, on July 1, 1992, informed INX by letter that

would seek arbitration, asked INX to assent to arbitrati

and appoint its arbitrator, said if INX failed to appoint

____________________

arising before or after the termination

of notice under this agreement shall be

entitled [sic] in an equitable rather

than a strictly legal manner and in such

cases the parties agree to submit to the

decision of arbitrator, one to be chosen

by the Company and the other by the

Reinsurer and in the event of

disagreement between these two, then an

Umpire, who shall have been chosen by the

said two arbitrators previous to their

entering upon the reference, the

arbitrators and/or umpire shall be

managers or chief officials of fire

Insurance and/or reinsurance companies.

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arbitrator, Menorah would ask that one be appointed for I

and that if INX failed to assent, then Menorah would fe

"free to pursue all other legal and judicial measur

available." INX responded promptly that it would n

arbitrate, that its financial condition was precarious, a

that even if ordered to arbitrate, its financial conditi

would preclude it from doing so.


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On September 10, 1992, Menorah filed suit in T

Aviv against INX. Although actually served, INX chose not

respond or contest, and default judgment was entered again

it for $812,907, interest at an annual rate of 11%, costs a

attorneys' fees. INX did not pay nor did it seek to remo

the default.

On September 2, 1993, Menorah filed an exequatu

action in the Superior Court in San Juan to enforce t

judgment. INX moved to dismiss, claiming for the first ti

that the controversies between the parties had to

arbitrated. On August 8, 1994, the court denied the motio

finding that INX had waived arbitration and that the Israe

judgment was valid, and ordered INX to answer. INX answere

again claiming arbitration, and counterclaimed that Menora


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____________________

3. "Exequatur" refers to an action to execute a judgme

from another jurisdiction. See Seetransport Wiking Tra ___ ________________________

Schiffahrtsgesellschaft MBH & Co. v. Navimpex Centra _____________________________________ _______________

Navala, 29 F.3d 79, 81-82 (2d Cir. 1994).______

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failure to submit the exequatur action to arbitration was

breach of its contractual duty of good faith. On October 1

1994, the Superior Court issued an order to show cause

the petition for exequatur should not be granted.

response, INX removed the action to the federal court under

U.S.C. 205.4

The federal court remanded the case on March 1

1995, finding that INX had waived arbitration and t

remaining claims were not subject to the federal arbitrati

scheme. Now, over three years after Menorah's origin

request for arbitration was refused and after the travel

this matter internationally through three different court


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____________________

4. Section 205 provides:

Where the subject matter of an action or

proceeding pending in a State court

relates to an arbitration agreement or

award falling under the Convention, the

defendant or the defendants may, at any

time before the trial thereof, remove

such action or proceeding to the district

court of the United States for the

district and division embracing the place

where the action or proceeding is

pending. The procedure for removal of

causes otherwise provided by law shall

apply, except that the ground for removal

provided in this section need not appear

on the face of the complaint but may be

shown in the petition for removal. For

the purposes of Chapter 1 of this title

any action or proceeding removed under

this section shall be deemed to have

been brought in the district court to

which it is removed.


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INX asks us to reverse the district court and send the matt

to arbitration.

Review of a district court's determination

waiver of arbitration is plenary. See Commercial Union In ___ ___________________

Co. v. Gilbane Bldg. Co., 992 F.2d 386, 390 (1st Cir. 1993 ___ __________________


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Leadertex, Inc. v. Morganton Dyeing & Finishing Corp.,________________ ____________________________________

F.3d 20, 25 (2d Cir. 1995). "[T]he findings upon which t

[legal] conclusion [of waiver] is based are predica

questions of fact, which may not be overturned unless clear

erroneous." Price v. Drexel Burnham Lambert, Inc., 791 F.

_____ _____________________________

1156, 1159 (5th Cir. 1986).

In the increasingly international business worl

the use of arbitration agreements may be particular

important to avoid the

uncertainty [that] will almost inevitably

exist with respect to any contract

touching two or more countries, each with

its own substantive laws and conflict-of-

laws rules. A contractual provision

specifying in advance the forum in which

disputes shall be litigated and the law

to be applied is, therefore, an almost


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indispensable precondition to achievement

of the orderliness and predictability

essential to any international business

transaction.

Scherk v. Alberto-Culver Co., 417 U.S. 506, 516 (1974 ______ __________________

These same interests motivated this country to adopt a

implement the Convention, under which this case was remo

to federal court:

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The goal of the Convention, and the

principal purpose underlying American

adoption and implementation of it, was to

encourage the recognition and enforcement

of commercial arbitration agreements in

international contracts and to unify the

standards by which agreements to

arbitrate are observed and arbitral

awardsareenforcedinthesignatorycountries.

Id. at 520 n.15. ___

Against this backdrop of a strong United Stat

policy favoring arbitration, INX essentially makes t

arguments. The district court erred, it says, in decidi

that it waived arbitration in the events of 1992. In a

event, INX says, it now has the right to have the question


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the enforceability of the Israeli judgment, including IN

counterclaim, determined by an arbitrator.

The district court did not err on either the fac

or the law. The explicit waiver came when INX was invited

arbitrate in July 1992. INX expressly declined. It is n

saved from that declination by the fact that Menorah

offered in the July 1, 1992 letter to have an arbitrat

appointed for INX. That offer too was declined and INX sa

it was both unwilling and unable to participate in t

arbitration.5

____________________

5. INX claims the agreement required an arbitrator________


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appointed for it if it declined to do so. The langua

hardly a model of clarity, does not so directly provide, a

easily could have done so were that the intent.

-8- 8

The implicit waiver came from INX's entire cour

of conduct. This court has repeatedly held that "parties

waive their right to arbitration and present their dispute

a court." Caribbean Insurance Services, Inc. v. Americ ___________________________________ _____


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Bankers Life Assurance Co., 715 F.2d 17, 19 (1st Cir. 1983 ___________________________

In Caribbean, we found waiver where the party claimi _________

arbitration delayed doing so until six months after it

sued and it had entered a stipulation for a speedy trial

exchange for a "reprieve from a likely contempt findin

Id. at 20. In Jones Motor Co. v. Chauffeurs, Teamsters a ___ _______________ ______________________

Helpers Local Union No. 633, 671 F.2d 38, 43 (1st Cir. _____________________________

cert. denied, 459 U.S. 943 (1982), we found waiver whe _____ ______

eleven months of litigation occurred before arbitration

first raised, saying:

[T]o require that parties go to

arbitration despite their having advanced

so far in court proceedings before


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seeking arbitration would often be

unfair, for it would effectively allow a

party sensing an adverse court decision a

second chance in another forum.

That sentiment applies here. In Gutor Int'l AG v. Raymo _______________ ____

Packer Co., 493 F.2d 938, 945 (1st Cir. 1974), we fou ___________

waiver where a party unconditionally submitted part of

arbitrable matter to the courts, but later attempted to ta

advantage of the arbitration clause when the opposing par

counterclaimed. Cf. Raytheon Co. v. Automated Busine ___ _____________ _______________

Systems, Inc., 882 F.2d 6, 8 (1st Cir. 1989) (defenda ______________

-9- 9


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waived issue of whether it consented to issue of puniti

damages being submitted to arbitration by delaying and t

raising it in desultory manner on first day of arbitrati

and not pursuing it).

It has been the rule in this Circuit that in or

for plaintiffs to prevail on "their claim of waiver, t

must show prejudice." Sevinor v. Merrill Lynch, Pierc _______ ____________________

Fenner & Smith, Inc., 807 F.2d 16, 18 (1st Cir. 198 _______________________


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(finding no prejudice where defendants explicitly a

promptly raised arbitration as a defense to a suit); acco

___

Commercial Union, 992 F.2d at 390. Because there was amp ________________

prejudice here, as the district court found, we have

reason to reconsider whether to apply the litmus test of

showing of prejudice to establish waiver or to apply

totality of circumstances test, as other circuits have don

See Metz v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,___ ____ _____________________________________________

F.3d 1482, 1489 (10th Cir. 1994) (applying a "totality of t

circumstances" test for the determination of waiver, whe

prejudice was but one factor); S+L+H S.p.A. v. Miller-S ____________ _______

Nazianz, Inc., 988 F.2d 1518, 1527 (7th Cir. 1993)._____________


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Ignoring its failure to appear in the Israe

action,6 INX characterizes its delay of over a year

____________________

6. INX asserts that its inaction during the proceedings

Israel was justified by its desire to preserve its right

challenge the jurisdiction of the Israeli court. But I

voluntarily entered into reinsurance agreements with

Israeli corporation that specified Tel Aviv as the site f

-10- 10


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seeking arbitration as insufficient to show prejudice. The

is no per se rule that a one year delay is or is n ___ __

sufficient to support waiver. Cf. J & S Constr. Co., Inc.___ _______________________

Travelers Indem. Co., 520 F.2d 809 (1st Cir. 1975) (thirte ____________________

month delay and participation in discovery was not enough

constitute a showing of prejudice). The period of delay he

was not one in which information useful to the ultima

resolution of the dispute was being procured throu

discovery. Cf. Cabinetree of Wis., Inc. v. Kraftma ___ ___________________________ ______

Cabinetry, Inc., 50 F.3d 388, 391 (7th Cir. 1995) (explaini _______________

that delay alone is not automatically a source of prejudi

and that on occasion it can comprise time the parties spe


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in determining information they would need in arbitrati

anyway). INX chose not to invoke arbitration from July 19

until October 1993 and Menorah bore the costs of proceedi

to try to obtain the sums it thought owed. See Van Ne ___ _____

Townhouses v. Mar Indus. Co., 862 F.2d 754, 759 (9th Ci __________ _______________

1988) (waiver found where party made conscious decision

delay demand for arbitration while continuing to se

judicial determination of arbitrable claims). There was

error in the district court's finding that Menorah incurr

____________________

any arbitration proceedings. In the commercial context

forum selection clause, even one for arbitration, confe


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personal jurisdiction on the courts of the chosen forum. S

Unionmutual Stock Life Ins. Co. of Am. v. Beneficial Li ________________________________________ _____________

Ins. Co., 774 F.2d 524, 527 (1st Cir. 1985). ________

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expenses as a direct result of INX's dilatory behavior a

that that was prejudice enough.

INX suggests that the question of arbitrabili


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should be decided in the first instance by the arbitrato

As to that and to INX's argument that the issue of t

enforceability of the Israeli judgment must itself

arbitrated, we are guided by First Options of Chicago, In ___________________________

v. Kaplan, 115 S. Ct. 1920 (1995). There, the court

______

faced with the question of who has the primary power

decide whether parties agreed to arbitrate the merits

their dispute. Id. at 1923. Here, we face a variant of t ___

question -- who has the primary power to decide whether t

parties agreed to arbitrate the issue of enforceability of

default judgment following failure to arbitrate under

arbitration clause. That question is appropriate because

is conceivable that parties could decide that su


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enforceability disputes are subject to arbitratio

"[A]rbitration is simply a matter of contract between t

parties; it is a way to resolve those disputes -- but on

those disputes -- that the parties have agreed to submit

arbitration."7 Id. at 1924.

___

____________________

7. There is precedent that, as a matter of law, actions

enforce foreign money judgments, even those confirmi

arbitration awards, are not preempted by the Convention. S

Island Territory of Curacao v. Solitron Devices, Inc., 4 ____________________________ _______________________

F.2d 1313, 1319 (2d Cir. 1973), cert. denied, 416 U.S. 9 _____ ______

(1974). We think, however, the better rule here is to foll

First Options. See also Mastrobuono v. Shearson Leh ______________ ___ ____ ___________ _____________

-12- 12


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So we apply the First Options rule: "Courts shou _____________

not assume that the parties agreed to arbitrate arbitrabili

unless there is 'clear and unmistakable' evidence that t

did so." Id. (citations omitted). There is nothing in t ___

agreement between INX and Menorah clearly stating that t

question of arbitrability of judgments should be decided

an arbitrator. Thequestion is onefor resolution by thecour


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We also agree with the district court t

arbitration of the enforceability of the Israeli judgment

not required. "[G]iven the principle that a party can

forced to arbitrate only those issues it specifically

agreed to submit to arbitration," id. at 1925, we do n ___

interpret the silence of the agreement on this point

create a right of arbitration. And if the agreement could

read for such an implication, INX has nevertheless waived i

right to arbitrate enforceability of the judgment.

The law does not lend itself to INX's claims a

ultimately, the strong policy reasons favoring arbitrati

and underlying the adoption of the Convention would

undercut, not served, by acceptance of INX's positio

Arbitration clauses were not meant to be another weapon


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the arsenal for imposing delay and costs in the dispu

____________________

Hutton, Inc., 115 S. Ct. 1212, 1216 (1995) (issue of whet _____________

arbitrator may award punitive damages "comes down to what t

contract has to say about the arbitrability of petitioner

claim for punitive damages").

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resolution process. Underlying the policy of enforci

contracts to arbitrate is a belief that where parties c

agree to a mutually optimal method and forum for dispu

resolution, it serves the interests of efficiency and econo

to allow them to do so. Cf. Mitsubishi Motors Corp. v. Sol ___ _______________________ __

Chrysler-Plymouth, Inc., 473 U.S. 614, 633 (1985); Glass_______________________ ____

Allied Workers Int'l Union, Local 182B v. Excelsior Foun _______________________________________ ______________

Co., 56 F.3d 844, 848 (7th Cir. 1995) ("Arbitration is___

service sold in a competitive market. The rules adopted

the sellers are presumptively efficient."); see also Ste ___ ____

Shavell, Alternative Dispute Resolution: An Econo _______________________________________________

Analysis, 24 J. Legal Stud. 1, 8-9 (1995) (a centr ________


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rationale for encouraging parties to contract for their o

method of dispute resolution is that they are likely to agr

to the most efficient forum to serve their needs).

In the context of international contracts, t

opportunities for increasing the cost, time and complexity

resolving disputes are magnified by the presence of multip

possible fora, each with its own different substantive rule

procedural schematas, and legal cultures. This is ferti

ground for manipulation and mischief, and acceptance of IN

arguments would lead to the very problems the Conventi

sought to avoid. Cf. Elizabeth Warren, Bankrupt ___ _______

Policymaking in an Imperfect World, 92 Mich. L. Rev. 33

___________________________________

348-49 (1993) (Differences among legal systems provi


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-14-

14

incentives for "nonproductive strategic behavior" as debto

attempt to take advantage of opportunities presented in wa

that are wasteful and drive up costs.). "The intenti

behind such [arbitration] clauses, and the reason f


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judicial enforcement of them, are not to allow or encoura

parties to proceed, either simultaneously or sequentially

multiple forums." Cabinetree, 50 F.3d at 390.__________

Neither efficiency nor economy are served

adopting INX's arguments. The scenario here -- in whic

party knowingly opts out of the arbitration for which it

contracted (even if driven by looming insolvency8), sits

its hands while a default judgment is entered against

after service, refuses to pay, requires an enforcement acti

be filed against it, and only then cries "arbitration"

undermines both the certainty and predictability whi

arbitration agreements are meant to foster. Cf. Mitsubis ___ _______

Motors, 473 U.S. at 631 (Courts should avoid inviti ______


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"'unseemly and mutually destructive jockeying by the parti

to secure tactical litigation advantages. . . . [It woul

damage the fabric of international commerce and trade, a

imperil the willingness and ability of businessmen to ent

____________________

8. Ordinarily in a dispute between on-going commerci

players "reputational" costs serve to soften inclinations

obtain an advantage in a single dispute. But where a par

is in financial distress, these reputational checks beco

far less effective. Cf. Ronald J. Gilson, Value Creation___ ______________

Business Lawyers: Legal Skills and Asset Pricing, 94 Yale_________________________________________________

J. 239, 289-90 (1984).

-15- 15


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into international commercial agreements.'") (quoting Scher

____

417 U.S. at 516-17); see also Gilmore v. Shearson/ ___ ____ _______ _________

Express Inc., 811 F.2d 108, 112 (2d Cir. 1987) (parti _____________

should not be permitted to use a delayed assertion

arbitration as a "tactic in a war of attrition designed

make the litigation too expensive for plaintiff"); Allie ____

Bruce Terminix Cos. v. Dobson, 115 S. Ct. 834, 841 (1995) ( ___________________ ______

interpreting the Federal Arbitration Act court notes t


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Congress intended to help parties avoid costs and delay).

The order remanding this case to the Superior Cou

of Puerto Rico is also appropriate, under either of t

alternative interpretations of the Convention. Section 2

allows removal if the subject matter of the [state] cou

action "relates to an arbitration agreement . . . falli

under the Convention," and it is arguable, though far fr

certain, that an action to enforce a default judgment where

defense is that the parties agreed to arbitrate is an acti

"relating to an arbitration agreement." If the case

viewed as being properly removed on the basis of both t

plaintiff's enforcement action and the counterclaim, then t

finding of waiver ultimately removed the basis for feder

jurisdiction.9


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____________________

9. Menorah argues that this court lacks appella

jurisdiction because the district court's remand order

based on a determination of its lack of subject matt

jurisdiction over the removed case and that 28 U.S.C.

1447(d) (1994) bars the review of such a determination. S

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If, on the other hand, the removal was based on t


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counterclaim alone, the pendent claim could be remande

Principles of pendent jurisdiction allowed the district cou

to exercise its discretion and relinquish jurisdiction over

removed case where all the federal claims were gone and on

pendent exequatur claims remained. See 28 U.S.C. 1367(

___

(1994); Carnegie-Mellon Univ. v. Cohill, 484 U.S. 343, 34 ______________________ ______

52, 355 n.11 (1988); Rodriguez v. Comas, 888 F.2d 899, 9 _________ _____

n.20 (1st Cir. 1989). Since this case had been in t

Commonwealth's courts for over a year prior to its remo

and was on the verge of resolution, the court's exercise

discretion to remand the pendent claims was particular

appropriate.

The district court's order remanding the case


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the Superior Court of Puerto Rico, so that the exequat

____________________

Things Remembered, Inc. v. Petrarca, 64 U.S.L.W. 4035, 40

________________________ ________

(U.S. Dec. 5, 1995). Menorah also argues that t

district court erred in granting removal of the proceedin

in the first place. Since Menorah easily wins an affirman

on the substantive issue of waiver, we decline to decide t

jurisdictional issues raised by it. See Norton v. Mathe ___ ______ _____

427 U.S. 524, 528-33 (1976) (where merits can be easi

resolved in favor of the party challenging jurisdictio

resolution of complex jurisdictional inquiry may be avoide

Lambert v. Kysar, 983 F.2d 1110, 1118 n.11 (1st Cir. 1993 _______ _____

Rhode Island Hosp. Trust Nat'l Bank v. Howard Communicatio ____________________________________ __________________

Corp., 980 F.2d 823, 829 (1st Cir. 1992). INX in turn argu _____

that there is no jurisdiction to hear Menorah's argument t

the case was improperly removed to federal court. Because

do not reach those arguments, we need not address t

jurisdictional issue either.


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action may proceed, is affirmed. Double costs are awarded________ ________________________

Menorah.

_______


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Documents

Menorah v. INX, 1st Cir. (1995)